Are We Still Going Broke By Degree?

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A dozen or so years ago, my friend Kim Dennis gave me a clever title for a book I wrote on higher education finances –“going broke by degree.” In four words, it well described an important dimension of the American academic world in the first decade of the 21st century. There is some new evidence, however, that, for the first time in many years, the ratio of tuition fees to household income has started to fall, meaning that the rising financial burden of attending college might be easing a little. People may not have to “go broke” so much. From 1840 (and perhaps earlier) to at least 1975, tuition fees were going up adjusting for general inflation, but by less than people’s income. From 1980 to 2014, by contrast, tuition fees rose sharply relative to people’s income, leading to a soaring student loan debt burden (actually, the reverse probably is more true: the availability of low interest loans induced colleges to raise tuition fees aggressively). This reflected both soaring tuition fees and a slowing of the growth in incomes, especially since 2000. However, new data from the Census Bureau and College Board suggest that maybe reversing a bit.

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The College Board data suggest that tuition fees this fall rose only 1.6 percent in inflation-adjusted terms at public four year universities, down a good deal from the 2.8 percent increase the previous year or the long term growth of around three percent a year over the past several decades. For private four year schools, inflation-adjusted fee increases were 2.7 percent, down modestly from the previous year’s 3.2 percent. For two year schools, the increase was similar to four year public institutions, 1.7 percent. Yet the Census Bureau indicated that the inflation-adjusted increase in median household income in 2015 was over five percent. Income increases were accelerating, tuition hikes were declining.

Much of this was to be expected. The demand for higher education generally has been stagnant, and even declining in some segments of the market. Resistance to tuition increases likewise generally has increased, although with one important exception. Raising sticker prices to increase revenues does not work for most schools. The sluggish demand for higher education reflects several factors, including a demographic one (a smaller 18 to 22 year old cohort), but mainly growing doubts about the value of a degree relative to its costs. Widespread underemployment of college graduates plus woes from high student loan debt has deterred some from pursuing college opportunities. A more robust job market than a few years ago has accentuated this development.

But I think the picture painted in the previous paragraphs might be too rosy, and ignores an important trend—the higher education market is fragmenting into three distinct categories. First, there are the Lexus/Tesla/Mercedes schools, predominantly but not exclusively highly selective private institutions, which are facing few of the problems cited above; their demand remains relatively robust, they charge less than the market-clearing price for their services (allowing them to raise tuition fees more aggressively now in order to raise revenue). These schools are still raising their fees around three percent a year adjusting for inflation.

Second, there are the Camry/Accord/Chevrolet schools, institutions that mostly offer a decent quality but non-luxurious product—most state universities and some less selective private institutions, including liberal arts colleges. Some are struggling for students and others are facing significant other financial challenges. Finally, there is the equivalent of the used car market, low priced alternatives to traditional universities–community colleges, and also the for-profit schools. Despite their low cost, increasingly people are asking: what are they adding to my employability, my human capital? These low priced schools are finding it very difficult to raise fees, as many have suffered huge enrollment losses.

Going forward, I suspect the 2015 reported rise in median household income is something of a fluke–gains of much more than one percent or so a year seem unsustainable given the slow growth in the underlying national output. So, even if the 2016 moderate tuition increases continue, the recent fall in the tuition-income ratio is not likely to continue. And the ratio will continue to rise at the elite private schools.

Of course, all of this could change if massive “free” tuition changes occur, very possible with Hilary Clinton and a Democratic Congress, much less so with Donald Trump and a Republican legislative branch. The nation’s fiscal condition is border-line precarious (a high ratio of national debt to GDP and huge unfunded liabilities for pensions and health care), so massive new entitlements are unaffordable without large tax increases, increases that would probably end the pathetically modest economic growth we still have.

So, on balance, we are still going broke, not only “by degree,” but also in a broader macroeconomic sense, despite the brief break in the dismal upward trend in the tuition fee/income ratio recently revealed. In a recent debate in which I participated, my opponent accused me of “wanting to take us back to the 1950’s.” What was wrong with the 1950s? High growth in incomes, world economic and moral leadership, low growth in university fees and a higher education on the ascendancy, however measured. Long live Ozzie and Harriet, I Love Lucy and other symbols of a long gone age.

Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

We are dedicated to researching the rising costs and stagnant efficiency in higher education, with special emphasis on the United States. CCAP seeks to facilitate a broader dialogue on the issues and problems facing the institutions of higher education with the public, poli...